Thinking Through the Market Opportunity for Direct Materials Outsourcing

Having recently spoken to a handful of procurement outsourcing providers, I've come to the conclusion that the global economic and trade environment has the potential to be about as a good a catalyst as any for the rise of direct material procurement outsourcing. Up until this point in procurement outsourcing's slow-moving ascent, direct materials outsourcing has played but a small role in the growth of the sector. But I believe this has the potential to change for a few reasons which have little to do with procurement technology adoption -- the primary catalyst that SAP is betting on, among other platform providers, for procurement outsourcing growth. Rather, I believe that when it comes to managing total costs on a global sourcing basis, a lot of US-based companies are going to begin to wake up to a serious dollar hangover in the coming quarters as the RMB appreciates and commodity price inflation shows no sign of abating. And it will be the need for a total cost, global Alka Seltzer that drives a willingness to investigate direct materials outsourcing opportunities.

Historically, when companies have made the decision to develop specific supply market geographies, they often created their own IPOs (international procurement offices). This type of investment made sense when export price stability was the rule, not the exception in China, India and other global sourcing investment hubs. But recently the triple whammy of an ever-softening dollar combined with local commodity price inflation and changes in tax/tariff structures -- at least in China -- is causing some to rethink the investments they've made in localized procurement operations designed for export operations only (it's a different animal for companies setting up operations to source from and sell into local markets). What's needed now, in my view, is a virtual approach to global procurement operations where companies trade off absolute control for flexibility.

For example, rather than jump to build out procurement infrastructure and find and train employees in Mexico, India or China, why not work with a third party from an on-the-ground operations perspective for areas which are not core to the business (and where it's possible to clearly set service level expectations and thresholds)? This type of situation could create flexibility when it comes to changing geographies (e.g., switching spend from China to Mexico) as the economics warrant it. It would also allow companies to clearly think through how best to deploy a shared services approach based on their own knowledge and process requirements. This will enable companies to decide what types of certain types of sourcing and supply management processes to keep in-house (e.g., make vs. buy decisions, category sourcing strategy development) while choosing to consider outsourcing processes in other areas better suited to the flexible nature that a third party could provide (e.g., operational procurement execution, customs/trade/logistics, supplier quality and performance monitoring, etc.)

Who will the solution-provider wildcards be if and when more manufacturers begin to consider this type of direct materials outsourcing arrangement? I reckon that global logistics providers/3PLs have a serious chance to expand their footprints and influence, not to mention marketshare, by working more closely with procurement practitioners and building practices in these areas (in addition to continuing to serve the supply chain and logistics functions inside companies). But don't count out the offshore procurement outsourcing providers -- and perhaps IBM and Accenture -- just yet.